CLEARING  HOUSE 
EXAMINATIONS  BY 
CLEARING  HOUSE 
EXAMINERS 


DISCUSSION  LED  BY 

MR.  J.  B.  FORGAN 

OF  CHICAGO 

AT  MEETING  OF  THE  CLEARING 
HOUSE  SECTION.  AMERICAN 
BANKERS’  ASSOCIATION,  AT 
LOS  ANGELES,  CALIFORNIA, 
THURSDAY,  OCTOBER  SIXTH, 
NINETEEN  HUNDRED  AND  TEN 


Clearing  House  Examinations  By 
Clearing  House  Examiners 

■ 

| 

The  above  caption  appeared  under  the  head  of  Discussions  in  the  program 
of  the  meeting  of  the  Clearing  House  Section, 
at  Los  Angeles,  October  6,  1910. 

' 

The  following  gentlemen  took  part  m the  discussion, 
which  is  herein  reprinted. 

J.  B.  FORGAN 

President  First  National  Bank,  Chicago,  111. 

SOL.  WEXLER 

\p  Vice-President  Whitney-Central  National  Bank,  New  Orleans,  La. 
President  of  the  Section 

E.  SHORROCK 

President  Northwest  Trust  and  Safe  Deposit  Co.,  Seattle,  Wash. 
STODDARD  JESS 

Vice-President  First  National  Bank,  Los  Angeles,  Cal. 

R.  T.  FORBES 

President  First  National  Bank,  St.  Joseph,  Mo. 

J.  THRALLS 

Manager  Kansas  City  Clearing  House  Association,  Kansas  City,  Mo. 
CHARLES  K.  McINIOSH 

Vice-President  San  Francisco  National  Bank,  San  Francisco,  Cal. 


1 verbatim  report  of  the  meeting  is  included  in  the  Book  of  Proceedings 
of  the  Thirty-sixth  Annual  Convention  of  the 
American  Bankers’  Association. 


35840 


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RmS5ic 


Clearing  House  Examinations  by  Clearing 
House  Examiners 


MR.  J.  B.  FORGAN,  CHICAGO 

Gentlemen:  You  are  doubtless  all  aware  that  the  examination  of 
banks  under  clearing  house  authority  was  first  inaugurated  in  Chicago. 
It  may  interest  you  to  know  just  what  brought  it  about. 

Three  banks — one  national  and  two  State — under  the  management  and 
control  of  one  man  had  failed.  Up  to  this  time  banks  connected  with 
the  Clearing  House  Association  were  only  required  to  render  to  the 
Clearing  House  Committee  copies  of  their  statements  made  five  times  a 
year  to  the  Comptroller  of  the  Currency  or  to  the  Auditor.  These 
statements  besides  the  balance  sheet,  give  the  amount  of  past  due  or 
suspended  paper,  a list  of  the  liabilities  of  directors  and  officers  or  of 
firms  or  corporations  in  which  they  are  interested,  a list  of  bonds  car- 
ried and  a list  of  excessive  loans. 

When  the  associated  banks  took  over  the  assets  of  these  three  failed 
banks  and  paid  their  deposits  it  was  found  that  notwithstanding  Gov- 
ernment examinations,  which  disclosed  the  true  conditions,  the  state- 
ment of  the  national  bank,  which  alone  had  clearing  house  privileges, 
did  not  disclose  a correct  list  of  bonds  carried  or  a true  statement  of 
the  excessive  loans  or  of  the  president’s  personal  liabilities  to  the  bank. 
These  were  hidden  by  a novel  practice  of  putting  through  fictitious 
loans  on  memorandum  notes  with  names  written  on  them  (all  in  the 
same  handwriting)  of  parties  who  had  nothing  whatever  to  do  with  the 
transactions  and  were  ignorant  of  their  existence.  These  notes  were 
made  out  for  $90,000  each  and  attached  to  them  were  $100,000  of  the 
bonds  of  a railway  company  owned  and  controlled  by  the  president  of 
the  bank.  The  loans  were  really  personal  to  him,  and  the  aggregate 
of  them  should  have  appeared  as  an  excessive  loan,  or  if  the  bonds 
were  sold  to  the  bank  at  90  per  cent,  of  their  face  value  they  should 
have  appeared  in  the  list  of  bonds.  In  either  case  the  Clearing  House 
Committee  would  have  been  informed  of  their  existence  in  the  bank; 
but  by  splitting  them  up  into  numerous  fictitious  loans  of  $90,000  each, 
which  was  within  the  bank’s  legal  limit,  they  became  merged  into  the 
aggregate  of  loans  current  and  no  special  attention  was  drawn  to  them 
in  the  statements  rendered.  This  practice  had  been  permitted  by  the 
Comptroller’s  department  to  go  on  for  years,  and  while  there  was  a 
suspicion  in  our  community  that  the  president  must  be  using  the  funds 
of  the  bank  in  his  different  outside  ventures  there  was  never  anything 


3 


in  the  statements  rendered  to  the  clearing  house  that  would  indicate 
that  such  was  the  case,  so  that  our  suspicions  were  allayed.  As  you 
are  aware,  the  Chicago  banks  heroically  took  over  the  assets  of  the  three 
banks  and  paid  off  their  deposits  at  considerable  loss  to  themselves. 

Clearing  house  examinations  in  Chicago  grew  out  of  this  incident. 
We  determined  to  know  for  ourselves  the  actual  condition  of  all  the 
banks  associated  together  in  the  clearing  house.  The  first  thing  to  do 
was  to  get  a competent  man  to  undertake  the  work.  We  were  very 
fortunate  in  discovering  the  right  kind  of  man.  We  did  not  hamper 
him  with  any  hard  and  fast  rules  or  arbitrary  instructions.  We  simply 
adopted  the  policy  that  he  with  sufficient  assistants  should  make  ex- 
aminations of  the  bank  and  report  on  the  conditions  found  by  him  in 
full  detail  to  the  directors  of  each  bank  examined.  His  reports  to  the 
directors  are  just  such  as  competent  accountants  would  make  were  they 
employed  by  the  directors  to  make  examinations.  In  this  way  each 
bank  has  the  advantage  of  having  an  examination  by  a competent  exam- 
iner made  expressly  for  the  directors  of  the  bank. 

Besides  this  the  examiner  makes  a general  report  to  the  Clearing 
House  Committee  on  the  conditions  found  by  him,  drawing  special 
attention  to  any  depreciated  assets,  any  irregularities  or  anything  in  the 
institution  open  to  serious  criticism. 

In  the  event  of  conditions  being  sufficiently  bad  to  warrant  it,  the 
committee  has  the  right  to  a perusal  of  the  detailed  report  made  to  the 
directors,  a copy  of  which  the  examiner  keeps  in  his  own  file. 

The  committee,  however,  as  you  understand,  does  not  call  for  this 
except  in  an  urgent  case  when  the  thing  is  very  bad  and  they  want  to 
get  right  to  the  bottom  of  it;  they  simply  act  on  the  general  report  that 
they  receive  from  the  examiner. 

On  the  basis  of  this  general  report,  if  there  is  anything  to  criticize 
the  committee  gets  into  touch  with  the  directors  of  the  bank  through  its 
president,  and  in  as  diplomatic  a way  as  possible  has  all  matters  open 
to  criticism  satisfactorily  explained  or  corrected. 

Each  bank  is  still  required  to  send  to  the  committee  a copy  of  the 
reports  made  to  the  Government  on  the  call  of  the  Comptroller  of  the 
Currency  or  the  State  Auditor,  as  the  case  may  be.  These  are  taken 
up  and  considered  by  the  Clearing  House  Committee  from  the  stand- 
point of  the  last  examination  made  to  it  by  the  Clearing  House  Exam- 
iner. The  committee  may  decline  to  pass  such  statements  as  satisfac- 
torily until  all  matters  criticized  in  the  examiner’s  report  are  shown 
to  have  been  corrected  or  provided  for. 

Thus  you  see  in  addition  to  the  special  report  made  to  the  committee 
by  the  examiner  after  he  has  made  an  examination  we  have  five  reports 
rendered  by  the  banks  themselves,  and  our  corrective  method  is  that 
after  we  have  received  a report  from  the  examiner,  unless  everything 
is  satisfactorily  explained,  we  will  not  pass  favorably  on  the  next  report 
rendered  by  the  bank  itself  as  being  a true  statement  of  its  condition 
unless  the  matters  objected  to  or  criticized  have  been  corrected. 


4 


1 lie  rule  that  guides  the  committee  is  a simple  one  and  is  applied 
without  fear  or  favor  to  all  banks  alike.  It  requires  that  the  state- 
ments of  the  banks  as  published  and  as  rendered  to  the  clearing  house 
must  divulge  their  true  condition,  which  means  that  their  assets  at  a 
far  and  reasonable  valuation  will  offset  their  liabilities,  including  their 
capital,  surplus  and  undivided  profits. 

The  great  advantage  of  the  clearing  house  examination  is  that  its 
committee  is  composed  of  local  banks  who  are  posted  on  local  credits 
and  are  familiar  with  or  can  easily  ascertain  the  value  of  local  securi- 
ties. Government  authorities,  either  national  or  State,  have  no  power 
to  interfere  otherwise  than  by  criticism  until  conditions  become  so  bad 
that  the  capital  of  a bank  is  materially  impaired  or  its  insolvency  ques- 
tioned. 

Now  that,  you  can  see,  is  very  different  from  the  attitude  of  the 
clearing  house  represented  by  the  committee  towards  the  statement.  If 
the  statement  does  not  show  a true  condition  of  existing  affairs  the 
clearing  house  interferes.  The  Government  interferes  if  the  conditions 
become  so  bad  that  the  capital  is  impaired,  which  is  a very  different 
story.  A bank  might  advertise  as  much  surplus  as  capital,  and  so  long 
as  its  capital  is  not  impaired  the  Comptroller  has  no  right,  by  law,  to 
interfere. 

The  clearing  house,  having  authority  to  discontinue  clearing  house 
privileges  to  any  bank  whose  condition  for  any  reason  whatever  is 
not  satisfactory  to  its  committee,  has  a leverage  that,  as  a rule,  checks 
its  members  up  before  conditions  become  serious  with  any  of  them. 
There  are  about  sixty  banks  connected  with  the  association  and  the 
examiner  can  only  get  round  them  once  a year.  Of  course,  matters 
may  go  very  far  wrong  in  a year,  but  where  it  is  deemed  necessary 
special  examinations  can  be  made  at  shorter  intervals. 

Such  are  the  methods  adopted  by  the  Chicago  Clearing  House  Associ- 
ation. They  have  worked  out  so  far  with  unqualified  success.  There 
has  been  neither  friction  nor  unpleasantness.  Bank  directors  realize 
the  great  benefits  derived  and  are  unstinted  in  their  praise  of  them. 
They  are  greatly  assisted  by  them  in  keeping  themselves  posted  on  the 
condition  of  their  banks  and  they  readily  co-operate  with  the  Clearing 
House  Committee  in  the  correction  or  elimination  of  anything  open  to 
criticism. 

Our  methods  insure  the  stirring  up  and  elimination  of  the  sediment 
which  is  liable  to  accumulate  in  the  banks.  I am  in  the  habit  of  classi- 
fying bank  assets  in  dairy  terms,  such  as  cream,  sweet  milk,  skim  milk, 
sour  milk  and  sediment.  In  the  bank,  as  in  the  dairy,  the  sediment 
falls  to  the  bottom,  where  it  remains  out  of  sight  and  out  of  mind  un- 
less constant  vigilance  is  exercised  in  its  elimination.  If  a bank’s 
management  is  weak  the  cream  is  liable  to  be  skimmed  off  the  top,  while 
the  sediment  accumulates  at  the  bottom,  and  gradually  its  assets  become 
so  permeated  with  it  that  they  form  a putrid  mass  of  curds  only  fit 
for  the  dump  pile  of  a receivership.  Clearing  house  examinations  tend 


5 


to  the  healthful  conservation  of  the  sweet  milk  and  cream  and  to  the 
elimination  of  the  sour  milk  and  sediment.  If  there  are  any  points 
that  occur  to  any  of  you  gentlemen  that  have  been  covered  by  our 
experience  I will  be  glad  to  answer  any  questions  that  you  may  ask. 
(Applause.) 

The  President  : Gentlemen,  tHe  subject  that  has  just  been 
discussed  by  Mr.  Forgan  is  of  such  great  importance,  and  we 
have  left  a space  on  our  program,  should  anyone  desire  to  ask 
any  questions,  or  discuss  it,  or  give  any  experiences  of  their  own, 
we  would  be  glad  to  hear  from  them,  and  if  not  we  will  proceed 
with  the  regular  program. 

Mr.  Shorrock  : I would  like,  Mr.  Chairman,  to  say  that  the 
plan  which  Mr.  Forgan  has  suggested  is  easy  for  the  large  cities, 
where  it  is  possible  for  them,  with  a minimum  expense  to  them- 
selves, to  obtain  a man  who  fulfills  all  the  requirements  of  the 
position.  Now,  such  an  examination,  it  has  occurred  to  me,  like 
any  other  examination,  is  only  of  value  proportionate  to  the 
caliber  of  the  man  who  makes  it.  You  'take  a small  city  and 
it  may  be  said,  I think,  without  contradiction,  that  it  would  be 
a burden  upon  the  banks  out  of  all  proportions  to  the  burden 
which  will  be  imposed  upon  the  banks  of  a city  like  Chicago,  and 
the  system  would  be  a failure,  because  the  man  who  could  be 
paid  by  an  assessment  upon  the  bank^  let  us  say  an  assessment 
on  each  bank  in  Chicago,  would  not  be  of  the  caliber  that  is  to 
be  desired.  Now,  it  is  to  be  remembered,  according  to  the  plan 
which  is  at  present  adopted,  that  the  person  in  charge  of  the 
examination  really  has,  as  1 understand  it,  to  fulfill  two  re- 
quirements. He  must  not  only  be  a competent  accountant,  but 
he  must  also  be  a good  judge  of  securities  and  collaterals.  It 
may  be  easy  to  find  one  and  easy  to  find  the  other,  but  it  is 
difficult  to  find  a combination  of  the  two  unless  in  the  case  of 
the  man  who  would  require  quite  a high  price  for  his  services. 
Now,  it  occurs  to  me,  to  ask,  in  throwing  out  that  general  ques- 
tion for  consideration,  whether  the  benefits  to  be  derived  from 
such  an  examination,  according  to  the  experiences  of  the  clear- 
ing houses  which  have  adopted  it,  depend  mostly  upon  the  ac- 
countant’s part  of  it  or  mostly  upon  the  judgment  and  know- 
ledge of  the  examiner  as  to  the  value  of  assets.  If  the  former, 
one  set  of  conditions  would  arise,  and  if  the  latter  another  set. 


6 


Now,  I can  quite  conceive  of  a man  being  found  or  a committee 
being  found  in  any  city,  however  small,  which  would  be  able  to 
pass  readily  and  intelligently  upon  the  assets  of  the  bank.  That 
would  involve  a great  deal  less  expense  because  it  would  not 
involve  the  very  close  and  careful  examination  of  the  books  such 
as  an  accountant  might  make.  It  is  a question  whether,  in  en- 
deavoring to  carry  out  this  general  program  on  the  part  of  this 
section,  a recommendation  to  smaller  cities  would  not  quite  ful- 
fill the  intent  or  pretty  nearly  fulfill  the  intent  of  the  plan,  if 
the  clearing  houses  themselves,  not  appointing  an  examiner  in 
the  full  sense  of  the  term  which  Mr.  Forgan  has  used,  appointed 
a man,  or  two  or  three  men,  before  whom  should  come  in  the  pro- 
cess of  examination,  the  assets  of  the  bank,  whether  securities  or 
loans.  The  question  I would  like  to  put  to  Mr.  Forgan,  and 
ask  him  is  whether  some  such  plan  might  not  fill  the  bill  in  the 
case  of  cities  which  might  not  feel  justified  in  incurring  the 
expense  of  a man  who  would  fulfill  the  double  function  of  an 
accountant  and  of  a judge  of  assets. 

The  President  : Mr.  Forgan  will  kindly  answer  the  question. 

Mr.  Forgan  : Mr.  Chairman,  of  course  anything  that  I 
might  say  in  answer  to  the  gentleman’s  question  in  regard  to 
the  smaller  cities  would  not  be  based  on  experience,  except  from 
the  fact  that,  in  my  career,  I have  been  a bank  inspector,  as  it 
is  called — it  is  the  same  as  an  examiner.  When  I was  bank 
inspector  I found  no  difficulty  whatever  in  going  into  any 
moderate  sized  bank  or  locality  and,  by  judicious  inquiry  and 
talking  over  matters  with  the  bank  management,  and  in  the  case 
of  our  banks  we  could  have  consultation  with  the  directors, 
calling  the  directors  together  and  going  over  with  them  the 
matter,  the  trouble  usually  being  that  the  management  of  the 
bank  is  left  to  an  individual,  and  the  directors  are  not  fully 
posted  as  to  what  is  going  on.  The  examiner  brings  information 
to  the  directors,  and  in  his  examination  he  would  have  a meeting 
of  the  directors  and  go  over  the  work  and  put  the  responsibility 
up  to  them  to  see  that  their  officers  are  making  the  right  kind  of 
loans.  Of  course,  I can  conceive  of  a bank  examiner  going  into 
one  part,  perhaps  smaller  outlying  banks,  with  the  same  ex- 
perience of  the  National  Bank  examiners,  who  would  go  in  and 


7 


tell  the  president  of  the  bank  that  he  would  like  to  meet  the 
directors.  The  president  said  to  him : “What  do  you  want  to 
meet  the  directors  for?”  “Why,  I would  like  to  go  over  the 
assets  with  them  and  see  what  they  know  about  the  people  to 
whom  you  have  been  making  loans.”  He  says,  “You  must  not 
do  that.  I could  not  stand  that.”  The  examiner  said,  “Why 
not?”  “Why,”  he  said,  “about  five  years  ago  a bank  examiner 
came  around  here  and  did  that  thing.  Now,  my  directors  are 
composed  of  a couple  of  merchants  in  the  town  here  and  eight 
or  nine  wealthy  farmers  around  the  district,  and  they  are  de- 
positors on  whom  I rely  for  my  deposits,  and  when  the  bank 
examiner  showed  them  the  conditions  they  very  promptly  went 
and  proposed  to  my  customers  that  they  would  loan  the  money 
direct,  and  instead  of  getting  three  per  cent,  from  the  bank  they 
got  six  or  eight  per  cent,  from  the  farmer;”  and  he  said:  “It 
came  mighty  near  winding  up  the  bank.”  Any  such  conditions 
as  that  might  occur  once  in  a while.  That  is  suggestive  of  what 
might  occur  in  the  smallest  localities.  But  it  seems  to  me  that 
any  difficulty  of  that  kind  could  be  overcome  if  banks  would 
group  in  sections  and  these  groups  elect  a . committee  of  re- 
sponsible men  among  the  directors  for  each  locality  with  whom 
the  bank  examiners  could  consult  in  the  same  way  that  they 
consult  with  the  clearing  house  committee  in  Chicago.  If  our 
bank  examiner  in  Chicago  goes  into  a bank  and  finds  anything 
he  does  not  know  about,  in  the  first  place  he  refers  to  the  mer- 
cantile agency  and  he  finds  out  all  he  can  from  that,  and  then 
he  has  the  credit  departments  of  all  the  banks  in  Chicago  at 
his  disposal,  and  he  has  the  committee  to  consult  with,  not 
necessarily  in  session.  He  is  the  examiner  of  the  bank  and  he 
comes  over  and  wants  to  know  what  you  know  about  such  and 
such  clearing,  or  such  and  such  a man,  without  telling  us  what 
his  reason  for  it  is,  and  we  give  it  to  him  to  the  best  of  our 
information,  and  then  he  becomes  informed,  and  the  longer  he 
is  at  it  the  more  he  knows  about  it.  I think  if  the  banks  of  the 
country  were  put  in  groups  it  would  be  well  worth  trying,  any- 
way. If  they  were,  all  that  would  be  necessary  would  be  to  get 
a man  of  ordinary  intelligence  and  knowledge  of  the  banking 
business  to  make  the  examination  and  to  have  a committee  with 


8 


whom  he  could  consult,  so  that  the  whole  responsibility  would 
not  remain  on  him,  as  to  the  desirability  of  any  asset 
in  the  bank  or  as  to  the  credit  of  any  borrower,  and 
the  expense  to  be  shared  from  the  business  of  the  bank.  The 
examiner’s  department  works  in  entire  accord  with  and  assists 
the  National  Bank  examiner,  and  the  National  Bank  examiner 
assists  them.  They  consult  together,  and  if  it  is  necessary  we 
can  get  the  correspondence  under  control  of  the  State  Comp- 
troller so  we  can  get  together  in  that.  We  find  that  both  the 
Comptroller’s  department  and  the  State  Auditor’s  department 
are  very  glad  of  any  suggestions  the  clearing  house  committee 
deem  to  make  with  regard  to  any  desire  or  thing  to  be  done 
in  connection  with  anything  that  is  wrong  in  any  of  the  banks 
of  the  community  so  far  as  the  committee  of  directors  is  con- 
cerned; in  Chicago  we  have  not  heard  anything  about  that,  so 
far  as  I am  aware.  I think  we  find  that  banks  after  they  get  to 
a certain  size  that  the  examination  can  better  be  accomplished 
by  the  directors  appointing  competent  auditors  to  do  the  work 
for  them,  and  I think  that  wherever  the  Comptroller  finds  that 
there  is  an  auditor  who  is  appointed  directly  by  the  directors 
to  make  an  examination  for  them  and  on  their  behalf,  and  over 
the  heads  of  the  president  or  any  of  the  other  officers  of  the 
bank,  and  that  the  report  comes  direct  to  the  directors  from  the 
auditor  and  makes  it  personal  from  the  board,  he  does  not  con- 
sider that.  A very  important  thing  has  been  suggested  to  me 
in  regard  to  that,  and  I should  have  mentioned  it  in  my  in- 
troductory remarks.  Our  examiner,  when  he  has  made  a report, 
notifies  every  director  in  the  bank  examined  that  the  report  to 
be  made  is  of  such  a character  and  his  report  in  every  detail 
filed  with  the  president  of  the  bank,  and  requests  them  to  produce 
the  report  and  to  acknowledge  receipt  of  this  notice  and  notify 
him  of  the  consequence,  so  that  the  director  does  not  participate 
in  the  performance  of  his  duty  any  more  than  the  officer  does. 
That  we  find  to  be  a very  important  thing. 

A Member:  I would  like  to  ask  this  question.  In  most  of 

the  States  there  is  more  or  less  jealousy  between  the  bankers, 
and  in  adopting  this  system  what  has  been  the  result?  The 
tendency  has  been  to  that  jealousy  and  feeling  for  fear  that  one 


9 


bank  would  discover  the  condition  of  the  other  banks.  What 
has  been  the  result  of  the  jealousy  that  usually  exists  between 
banks  in  cities? 

Mr.  Forgan:  I will  say  in  regard  to  that,  that  our  ex- 

perience has  been,  perhaps,  exceptional.  We  have  never  seen 
the  slightest  sign  of  any  question  being  raised  as  to  the  correct- 
ness of  an  examinees  report,  or  that  his  report  was  anything  but 
intentionally  correct,  and  that  the  criticism  of  the  clearing  house 
committee  based  on  it  has  been  just  and  equitable,  and  instead 
of  increasing  jealousies  it  has  given  us  a sort  of  a brotherhood. 
We  are  working  under  what  might  be  called  a gentlemen’s  agree- 
ment, and  we  are  all  pledged  to  the  same  thing,  that  we  will 
keep  our  banks  open  to  an  examination  and  in  such  condition 
that  they  can  be  examined,  and  there  is  not  a single  bank  that 
has  been  examined  that  has  not  expressed  the  greatest  willing- 
ness to  put  themselves  in  the  exact  position  that  the  clearing 
house  committee  has  thought  they  should;  and  we  have  got 
nothing  but  thanks  in  every  instance.  I will  be  exactly  truthful. 
We  did  have  one.  A board  of  directors  did  say  that  we  had 
been  unnecessarily  severe.  But  that  exception  proves  the  rule, 
and  I wish  to  say  this,  that  in  regard  to  that  bank,  to-day  there 
is  not  a bank  in  the  city  of  Chicago  that  has  so  profusely  and  so 
strongly  thanked  the  committee,  the  clearing  house  committee 
and  the  bank  examiner  for  what  they  said  and  what  they  did 
and  what  they  have  accomplished  through  the  advice  given.  The 
strongest  supporter  we  have  to-day  is  the  only  one  that  ever 
objected.  (Applause.) 

Mr.  Jess:  Mr.  Chairman,  in  Los  Angeles  we  maintain  a 

special  clearing  house  examiner,  as  does  our  sister  city,  San 
Francisco.  And  to  give  our  testimony  as  to  the  efficacy  and  de- 
sirability of  the  system  of  the  clearing  house  in  all  our  cities, 
naming  special  examiners,  we  feel  that  the  services  that  have 
been  rendered  have  been  most  efficient.  We  believe  that  bankers 
know  more  about  the  conduct  of  the  banks  in  their  cities  than 
do  government  examiners,  in  a general  way.  We  can  put  our 
fingers  on  the  inconsistencies  at  all  times.  We  can  know  our- 
selves where  we  should  make  examinations,  both  to  the  interest 
of  the  bank  that  is  perhaps  being  run  injudiciously  and  to  the 


10 


advantage  to  the  other  financial  institutions  of  the  city,  and  to 
the  interest  of  the  entire  city.  I wish  to  say  this,  that  I think 
will  be  of  interest  to  you.  I see  no  reason  why  this  system  which 
has  been  so  satisfactory  to  the  clearing  house  banks  cannot  be 
extended  and  wisely  extended  for  taking  in  other  banks  in  the 
whole  length  and  breadth  of  our  land.  In  California  we  formed 
a tentative  organization  of  the  banks  of  our  entire  State  with  the 
idea  of  having  a central  committee,  districting  the  State  into 
districts  and  having  clearing  house  examiners  or  examiners  sup- 
ported by  the  banks  to  examine  every  bank  throughout  the 
State.  I think  that  any  State  can  be  so  organized  and  maintain 
a special  examiner  at  all  times,  who  will  have  the  advice  of  a 
central  committee,  and  who  would  have  the  whole  matter  in 
charge.  I can  see  no  reason  why  such  a beneficent  system  should 
not  be  extended  to  all  the  banks  in  every  city  in  the  Union. 
(Applause.) 

Mr.  Forbes  : 1 would  like  to  ask  Mr.  Forgan’s  opinion  on 

just  one  point;  that  is  the  employment  of  an  examiner;  whether 
or  not  he  would  consider  a special  examiner  for  a city  or  com- 
munity who  devotes  his  entire  time  to  that  community,  regard- 
less of  whether  he  may  be  of  ordinary  ability  or  not,  as  com- 
pared with  employment  by  an  auditing  firm  who  makes  these 
examinations.  It  is  getting  to  be  customary  for  auditing  com- 
mittees to  do  this  work.  I would  like  to  know  whether  or  not 
he  would  consider  the  services  of  a man  who  would  do  nothing 
else,  even  if  he  were  only  paid  a thousand  dollars  a year,  as  com- 
pared with  running  one  of  these  mercantile  concerns. 

Mr.  Forgan  : I think,  Mr.  Forbes,  the  clearing  house,  or  the 
group  examiner  employed  by  the  bank,  having  a committee  to 
consult  with,  is  preferable  to  an  outside  examination  by  these 
auditing  companies.  I will  say  that,  notwithstanding  I am 
interested  and  a director  of  these  auditing  companies,  and  I am 
talking  a little  bit  against  my  own  pocket,  perhaps,  as  I should 
like  to  get  that  sort  of  business.  I would  not,  however,  for  one 
minute  depreciate  the  audit  made  by  a competent  auditing 
company,  because  they  employ  good  accountants  and  they  make 
a very  thorough  examination,  and  very  frequently,  so  far  as  the 
internal  working  of  the  bank  is  concerned,  they  make  a great 


11 


many  good  recommendations.  But  when  it  comes  to  credits, 
I think  that  a man  employed  by  the  association  and  having  the 
confidential  advice  of  every  member  of  that  association,  and 
who  is  judicious  in  his  efforts  to  obtain  the  information,  is  the 
proper  way.  He  can  go  to  anyone  in  it  and  ask  about  John 
Smith.  He  does  not  have  to  say  that  John  Smith  has  a note 
for  $2,500.  All  he  has  got  to  do  is  to  make  the  ordinary  in- 
quiries around  and  get  more  than  one  opinion  about  the  man 
he  is  investigating  about,  or  the  security,  whatever  it  is.  Now, 
he  has  access  to  all  the  members  of  the  association,  either  a 
clearing  house  or  a group.  He  can  consult  with  them,  and  that 
is  the  way  we  get  our  information  ourselves.  We  consult  with 
each  other.  And  he  has  us  all  to  consult,  whereas,  when  an  audit- 
ing company  goes  to  work  to  send  out  men  who  are  apparent 
strangers  to  the  community,  of  course,  and  when  he  comes  in  he 
might  explain  he  wants  the  information  because  he  is  examining 
the  bank,  but  he  would  not  be  as  liable  to  get  as  strictly  frank 
and  straightforward  information,  perhaps,  because  they  would 
say,  “I  don’t  know  what  he  is  investigating  for.  I don’t  know 
what  he  wants  of  it.”  Anyway  he  would  not  get  in  touch  with 
them.  He  would  not  get  in  touch  with  the  other  members  of  the 
association  outside  of  the  one  he  was  examining  in  the  same  way 
that  an  employee  of  the  association  would,  where  everybody  felt 
that,  in  order  to  have  things  done  right,  he  is  bound  to  examine 
properly  in  regard  to  any  question  he  wants  to  ask.  Therefore, 
to  that  extent,  without  the  slightest  degree  waiting  to  reflect  in 
any  way  upon  an  audit  company’s  examination,  which  is  an 
excellent  thing  to  have,  I would  say  that  I personally  prefer  the 
examiner  employed  for  the  purpose  by  an  association  among 
themselves,  who  has  the  committee  of  the  association  to  deal  with 
and  to  consult  with,  and  has  all  the  members  besides  to  consult 
with,  and  they  naturally  would  give  him  the  best  information 
they  would  have. 

The  President:  Gentlemen,  we  have  thirty  minutes  before 
the  noon  recess,  and  if  it  is  agreeable  to  you  we  will  devote  that 
time  to  a discussion  on  any  of  the  matters  which  have  been  dis- 
cussed up  to  the  present  time.  That  is,  if  there  are  any  questions 
which  you  desire  to  be  asked  concerning  the  making  of  clearing 


12 


house  reports,  or  the  numbering  and  lettering  of  banks,  or  any 
of  the  subjects  referred  to  in  any  of  the  reports,  that  thirty 
minutes  will  be  very  well  devoted  to  that  purpose. 

(It  was  moved  that  a vote  of  thanks  of  this  Section  be  given 
Mr.  Forgan  for  his  paper  on  “Clearing  House  Examinations  by 
Clearing  House  Examiners.”  Seconded  and  duly  carried.) 

Mr.  Thralls  : I just  want  to  make  a few  remarks  with  re- 
gard to  the  expense  of  examination.  Some  of  the  gentlemen 
seem  to  be  afraid  of  that  on  account  of  the  expense  of  special 
examiners.  We  have  tried  the  system  for  three  years,  and  I don’t 
think  there  is  a man  in  our  city  who  would  not  be  glad  to  spend 
three  times  what  we  are  spending  for  the  examination. 

Mr.  McIntosh:  We  have  a system  of  clearing  house  ex- 

aminers modelled  somewhat  on  the  Chicago  plan,  but  with  slight 
modifications,  which  I think  answer  some  of  the  objections  that 
seem  to  be  in  the  minds  of  some  of  the  members,  more  particu- 
larly that  of  secrecy  and  possible  jealousies  that  might  arise  by 
reason  of  the  knowledge  of  the  intimate  affairs  of  each  bank, 
or  at  least  known  to  a committee  which  is  subject  to  change  at 
annual  elections.  Our  examiner  there  was  chosen  by  reason  of 
his  knowledge  of  credits  of  the  city  and  his  fitness  as  a bank 
manager.  He  reports  to  the  clearing  house  committee  only  such 
factors  in  relation  to  the  examinations  that  he  has  made  which, 
in  his  judgment,  threaten  loss  or  show  unsound  methods  or  un- 
conservative methods.  He  does  not  report  to  us,  if  he  has  ex- 
amined the  First  National  Bank  of  our  city,  anything  except 
that  he  has  examined  that  bank  and  finds  its  conditions  satis- 
factory. We  know  nothing  of  the  details.  Our  first  object  is 
to  the  depositor  and  not  to  the  stockholder.  We  regard  our  first 
responsibility  to  the  depositor,  and  if  there  is  a minimum  of 
shrinkage  in  a bank  amply  strong,  that  fact  is  not  reported  to 
the  clearing  house  committee.  But  he  is  instructed — not  only 
authorized  but  instructed,  and  of  necessity  must  report  to  our 
committee  any  factor  in  relation  to  the  examination  he  thinks 
threatens  the  solvency  of  the  bank,  in  case  of  unsoundness  of 
conduct  of  a tendency  toward  a line  of  conduct  which  would 
ultimately  bring  the  bank  into  difficulties.  But  in  the  meantime 


13 


there  is  nothing  reported  to  the  clearing  house  committee  of 
any  detail  in  connection  with  the  management  of  the  bank, 
which  1 think  is  objectionable  to  banks  in  a city  dealing  in 
intimate  affairs. 

The  President:  As  I understand  from  Mr.  Forgan,  that  is 
the  identical  course  pursued  in  Chicago.  There  is  no  report  made 
to  the  clearing  house  committee  unless  some  serious  results 
develop.  The  . result  of  that  examination  is  reported  to  the 

particular  bank  that  has  been  examined  and  their  attention 
called  to  it.  So  there  is  practically  no  difference  between  your 
method  and  that  in  Chicago. 

Mr.  Forgan:  With  this  additional  idea:  that  in  Chicago,  if 
things  are  very  bad,  and  are  reported  to  be  generally  bad,  if  the 
sediment  gets  so  near  the  top  that  the  thing  is  dangerous  all  the 
way  through,  then  the  clearing  house  committee  has  the  right 
to  get  from  the  examiner  his  detailed  report.  But,  in  doing  so, 
they  notify  the  bank  that  they  are  doing  so,  and  then  they  have 
a meeting  of  the  directors  with  them,  or  a committee  of  the 
directors,  and.  they  go  over  the  whole  thing. 

Mr.  McIntosh:  It  was  my  impression,  after  speaking  to 

some  of  the  members  of  the  Chicago  Clearing  House  Committee, 
that  more  complete  details  in  each  report  were  given,  given,  per- 
chance, on  Mr.  Forgan’s  own  bank.  An  asset  was  carried  a 
little  higher  than  it  should  be.  That  would  not  be  reported. 

. Mr.  Forgan  : Yes.  For  instance,  you  take  the  bond  account 
of  any  bank.  If  there  was  a large  depreciation  in  the  bonds  it 
wrould  be  shown  by  the  market  value  being  quoted  by  the  ex- 
aminer and  the  deficiency  shown  the  committee.  But  that  is 
nothing  more  than  the  bank  would  be  required  to  do  five  times 
a year  in  its  own  statement. 

Mr.  McIntosh  : Does  your  committee  criticize  an  individual 
loan,  that,  in  its  judgment,  may  not  be  desirable  from  the  stand- 
point of  the  bank?  And  is  it  presented  to  you,  whether  it 
threatens  the  bank  or  not  ? 

Mr.  Forgan:  Yes,  slow  loans  are  reported.  Slow  and  ex- 

cessive loans  are  picked  out  and  listed. 


14 


Mr.  McIntosh  : If  our  examiner  finds  any  excessive  or  slow 
loans  he  takes  them  up  to  the  directors  of  each  bank.  If  he  is 
unable  to  work  it  out  he  then  brings  it  to  the  committee.  He 
does  not  report  to  us  that  the  First  National  Bank,  or  in  the 
Second  National  Bank,  he  has  found  a slow  loan  or  he  has 
found  a loan  which,  in  his  judgment,  is  excessive.  He  corrects 
it  with  the  bank  itself,  and  only  those  things  which  threaten 
the  soundness  of  the  conduct,  as  a principle,  does  he  report. 


15 


Wynkoop  Hallenbeck  Cranford  Co.  New  York 


9 


